Inequality for All?

The economic and opportunity gaps are growing at an alarming rate. It's no longer true that the rising tide of productivity will lift all boats

America then exhibits in her social state a most extraordinary phenomenon. Men are there seen on a greater equality in point of fortune and intellect, or, in other words, more equal in their strength than in any other country of the world, or in any age of which history has preserved the remembrance. —Alexis de Tocqueville, Democracy in America, 1835

Many of Tocqueville's trenchant observations about early 19th-century American society still resonate. It's one of the pleasures of reading his writings. But his famous comment about equality seems increasingly anachronistic. Over the past three decades, the U.S. has steadily become a society defined by inequality in income and inequity in opportunity.

Economic inequality is a hot topic. A populist campaign against widening inequality helped propel Democrats to power in Washington in the last election. The nation's chief economist, Federal Reserve Board Chairman Ben Bernanke, highlighted the troubling distribution of income and opportunity in a Feb. 6 speech before the Greater Omaha Chamber of Commerce.

A week earlier, seemingly for the first time in his Administration, President Bush remarked on the trend. "The fact is that income inequality is real," the President said in a talk before business leaders in the heart of Wall Street. "It has been rising for more than 25 years." Yet the discussion never really seemed to gain traction. Until now.

Undisputable Evidence

Why the sudden surge in attention? One reason is that the men and women who occupy the commanding heights of society and the economy worry that a political backlash against economic inequality and economic insecurity is brewing. Political pressures could force leaders to embrace protectionist policies that restrain creative destruction, economist Joseph Schumpeter's famous metaphor for the wellspring of economic growth in a capitalist economy. "But hindering the adoption of new technologies or inhibiting trade flows would do far more harm than good, as technology and trade are critical sources of overall economic growth and increases in living standards," said Bernanke.

Another reason is that, after decades of dispute, few doubt the evidence of widening inequality. For example, between 1970 and 2006, real weekly earnings of the median worker rose by about 11.5%, according to Bernanke. But wages among those in the 90th percentile jumped 34%. Even more striking are the results of a paper by Northwestern University economists Ian Dew-Becker and Robert Gordon. The scholars found that real wages and salaries for the median worker had risen by only 11%, or at an average annual rate of 0.3% a year, from 1966 to 2001. In sharp contrast, wages and salaries for the 99th percentile jumped 121% (2.26% a year), and the 99.9th percentile profited from a 236% gain (3.48% annual average). America's top earners are enjoying riches worthy "of the Robber Barons of the 1890s or the Gilded Age of the 1920s," wrote Gordon and Dew-Becker.

What's more, the traditional promise that the rising tide of a strong economy and rapid productivity growth will lift all boats isn't proving true. Throughout much of American history, citizens didn't concern themselves if the rich got richer so long as most everyone else prospered, too. The building block for raising the living standard of the mass of Americans has always been higher productivity. And for the past decade, productivity growth has been robust.

Rising Economic Insecurity

Yet waiting for the income payoff has been like waiting for Godot. For example, between 2001 and 2005, productivity expanded at a strong 3.1% average annual rate while real compensation per hour rose at a pace of just 1.4%, calculates Stephen Roach, chief economist at Morgan Stanley (MS). And Gordon and Dew-Becker found that only the top 10% of workers saw their wages and salaries grow along with productivity since 1966.